The Budget Blame Game

There's nothing that says 'teamwork' like a reallocation of resources.

Ah, the end of the year: A time to review the year’s successes while blaming others for the failures.

It also happens to be the time to finalize what is commonly referred to as the “biggest fiction book ever created:” Your 2016 budget.

What is budgeting? Budgeting is the process in which the ill-informed make estimates about things beyond their control and then extrapolate answers based upon the required results.

For those uninitiated with the budgeting process, it goes something like this:

1.Business units (departments) are asked to submit their sales, expense, and capital requirements.

2.These groups carefully analyze their existing revenue and cost numbers, add a “risk factor,” and send their results to the CFO (who is, by definition, a risk).

3. The numbers are consolidated, and preliminary results are given to the CEO.

4.9-1-1 is called after the CEO clutches his heart and stammers, “over……head.”

5.Budgets are cut, randomly.

6.The senior management team, because the numbers are still unsatisfactory, huddles together and modifies things such as “prepay assumptions” and “offering rates” until the budget brings a final result deemed “stinky, yet passable” to the uneducated.

7. The budget is presented to the board through a process called a “Budget PowerPoint.” That’s a mechanism where simple numbers are dissected into busy, cluttered, and nonsensical gibberish on a large number of slides. Bonus if you use multiple fonts.

Cynical? Possibly. But there are a number of problems with traditional budgeting:

• Budgeting every account. The truth is, only a few accounts control your financial picture. And fewer still are even remotely in your realm of control.

In the classic business process book, “The Goal,” manufacturers learned they only had to control a few steps in their process to control their cost, efficiency, and profit. Budgeting is similar: a few accounts “drive” the rest.

• Human behavior and budgets. Find me a department running under budget through November and I’ll find you a department that will have a very expensive December. Why? Because they don’t want its budget cut next year.

And for those who do budget adjustments during the year, you will find parts of your organization front-loading their expenses—before you have a chance to cut them.

Instead: Use a rolling 12-month review for everyone.

• Budget has only one goal: “Better.” Like gym class in junior high, budgets normally are graded via pass/fail. You either were on budget or not (although I got an “I” in gym for incomplete—honest).

Thus, the goal for organizations is simple: How low can this bar go?

Instead: Think about using external metrics wherever possible. For example, use a cost per transaction for your branches rather than a fixed payroll estimate.

• Budgets pit us against each other. A 50% increase in one department’s budget most likely means a decrease somewhere else. There’s nothing that says “teamwork” like a reallocation of resources!

Instead: Put aside money for projects that are addressed by a team and graded on their impact, likelihood of success, and match to the vision of the organization.

• The Magic 8 Ball is broken. All budgets rely on a base of assumptions. Some, like short-term interest rates, have eluded even the best economists for the past few years. Even minor variances can lead to large variances.

Instead: Do various scenarios to see the range of results.

Of course, if you don’t make budget, all you need to do is to have something (or someone) else to blame. Pick a regulator, any regulator.

JAMES COLLINSis president/CEO at O Bee CU, Tumwater, Wash. Contact him at 360-943-0740.

Who should be the 2018 CU Hero of the Year?

Champion of America’s Credit Unions

Credit Union National Association is the only national association that advocates on behalf of all of America’s credit unions. We work tirelessly to protect your best interests in Washington and all 50 states. We fuel your professional growth at every level and champion the credit union story at every turn.